The Mortgage-Backed Securities Market - Is the Other Shoe Getting Ready to Drop?
Many prime mortgage loans taken out by upscale homeowners are experiencing serious problems now that the recession is in full swing. Although previously non-prime mortgage loans (subprime loans, Alt-A loans and home equity loans) were the main loans experiencing delinquencies and foreclosures, USA Today found that the percentage of delinquent prime mortgage loans has more than doubled from 1.1% at the end of March 2008 to 2.4% at the end of the year.
High-income earners now must deal with both the prospect of unemployment and the rapid devaluation of their homes. Numerous affluent areas originally thought to be immune from the real estate catastrophe have begun to lose value precipitously. Business Week confirms that “there are enough $750,000-plus homes on the market to cover 40 months’ worth of sales.” States that experienced the highest increases in housing prices during the housing boom are being hit harder than the rest of the country.
Job losses are also beginning to impact affluent homeowners in large numbers. Business Week notes that adults holding bachelor degrees had only a 2% unemployment rate last year but as of April 2009 are experiencing a daunting 4.4% unemployment rate. Foreclosure rates on prime mortgage loans are increasing at particularly high rates in areas with high unemployment. This suggests that continued layoffs and other increases in unemployment will cause more foreclosures in the prime mortgage market.
All of this news indicates that the mortgage-backed securities market faces more rough times ahead. Significant increases in prime mortgage foreclosures would both put more people on the street and flood an already weak housing market with more supply thus further lowering housing prices. This development would not only frustrate economic recovery but would likely result in a continued downward spiral in home prices undermining the value of the security backing prime mortgages and damaging mortgage-backed securities.
